Chances for principal reduction on underwater mortgages improve, a bit

Housing advocates who have been clamoring for principal reductions on underwater home loans got two bits of good news Wednesday. President Obama nominated Rep. Mel Watt, a North Carolina Democrat and advocate of principal reduction, to become the permanent head of the agency that regulates Fannie Mae and Freddie Mac.

If confirmed by the Senate, Watt would replace Edward DeMarco, who has been acting director of the Federal Housing Finance Agency since 2009. DeMarco has steadfastly opposed permanent principal reductions on loans backed by Fannie and Freddie but endorses a temporary reduction known as forbearance. However, Obama’s previous nominee to permanently head the FHFA, Joseph Smith, faced stiff opposition from Republicans and withdrew from consideration.

Also on Wednesday, the Congressional Budget Office released a study that examined three options for reducing loan balances on owner-occupied homes that are worth less than the loan balance and where the owner is delinquent or at risk of becoming delinquent. The options would reduce balances down to 115, 100 or 90 percent of the market value. “CBO finds that all three options would probably result in small savings to the government, slightly reduce mortgage foreclosure and delinquency rates, and slightly boost overall economic growth,” it concluded.

It would boost economic growth because homeowners with less mortgage debt could borrow to buy cars and other goods and services. In other words, it would replace one kind of debt for another.

To read more, see my story in Thursday’s Chronicle here or follow me on Twitter @kathpender.